There aren’t too many people that buy vehicles with cash, though that’s not a bad idea if you can afford to. This means that most people rely on financing to get a car. That’s not a bad thing, but it means that it is up to you to take the time to understand auto financing before you make the purchase. If you don’t know what you are doing, you could end up paying more than you have to, or going with the wrong lender.
What Lenders Pay Attention To
Lenders look at specific factors when determining how much money to give you and what interest rate you'll be offered. These factors can affect your overall payment amount wildly and have a big impact on the price of the car that you can afford.
Your Credit – Your credit score and credit history play a big part in the loan that you can get. If you have a very poor history, you are going to get a higher interest rate and likely a smaller loan as well.
Your Debt to Income Ratio – The total amount of money that you have after you pay your debt for the month is what you have available to spend on a vehicle. The total you make compared to your debt is called your debt to income ratio, and this is the figure that most lenders use to determine how much money to give you. Make sure that you pay off as much of your debt as you can before going for a loan. Doing so will likely result in a larger loan and more favorable interest rate.
Vehicle Age – Many lenders have strict vehicle age and mileage requirements when buyers are looking at different options. If you pick out something that’s just too old, or that has too many miles, you won’t be able to get a loan on it, so be careful and know the requirements.
Items That Affect Your Payment
When you finally decide on a vehicle and get a loan for it, there will be a few things that affect the overall size of your payment.
Cost of Vehicle – The cost of the vehicle is the main thing that affects your payment. The higher the cost, the higher your payment will be.
Interest Rate – Next is the interest rate. The higher your interest rate, the higher your monthly cost will be, even if you don’t raise the price of the vehicle at all.
Loan Length – The longer your loan term is, the less you’ll pay each month toward the vehicle’s cost. Longer terms are a good way to lower your monthly payments, but they also cost you more in interest than short-term loans do.
Financing through a Bank or Dealership
When purchasing a vehicle, financing can be handled through a variety of sources such as banks, credit unions, the dealership itself or from a number of online lenders. Generally, banks are stricter about who they give loans out to, but they offer better interest rates and more favorable terms overall. They also give you more negotiating power when you head into the dealership.
When financing through a dealership you are going to get a higher interest rate in most instances, but you’ll be more likely to be approved for a loan. You’ll also enjoy lower payments in many cases because the dealership will extend the length of the loan as much as possible to encourage you to buy the vehicle. Financing through a dealership takes away your bargaining power and usually ends up costing you more when you purchase the vehicle.
When buying a vehicle, it’s in your best interests to be pre-approved before you ever step foot on the lot of the dealership. This gives you more bargaining power and allows you to purchase the vehicle that you want for less money.
Buying a vehicle isn’t too difficult, but it is a process, especially when you rely on financing to do it. Make sure that you are taking all the steps that you can to save yourself money through this process. Get pre-approved, and negotiate the price of the vehicle down more so that you aren’t paying so much.